The U.S. Pacific Bell Price Squeeze Case

In 2009, the United States Supreme Court issued an important decision related to price squeeze practices and competition in the American telecommunications sector.  In Pacific Bell Telephone v. Linkline Communications[1], a group of independent Internet service providers initiated legal proceedings against Pacific Bell Telephone (hereinafter AT&T) under the Sherman Antitrust Act (the “Sherman Act”), the American anti-trust (competition) legislation.  The Internet service providers compete with AT&T in the retail DSL market in California.  These service providers lease wholesale DSL transport services from AT&T in order to provide retail DSL services since they do not own all the facilities necessary to supply DSL services on their own.  AT&T thus competes in both the upstream and downstream DSL markets.

The Internet service providers argued that AT&T unlawfully squeezed their profit margins by charging them a high price for wholesale DSL services while charging their own end-user customers a low price for retail DSL services.  The service providers argued that AT&T’s price squeeze practices violated §2 of the Sherman Act (see text box below).  At the time, the American regulator, the Federal Communications Commission (FCC), no longer required incumbent service providers like AT&T to sell DSL transmission services to new entrants on the grounds that a competitive market beyond DSL for high speed Internet services had emerged.  However, as a condition of a merger, AT&T was required to provide wholesale DSL transport services to independent service providers at a price no greater than the retail price of AT&T’s DSL service.

§2 Sherman Act, 15 U.S.C.
Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.

The central question before the Supreme Court was whether price squeezing practices could constitute a violation of §2 of the Sherman Act if there was no existing duty to provide services to competitors.  The Court noted that, as a general rule, businesses have the economic freedom to choose the parties with whom they will deal and the prices, terms, and conditions for any such dealings.  The Court outlined two situations in which this economic freedom is limited such that a dominant firm may incur anti-trust liability for engaging in price squeezing.  First, firms may not charge predatory prices, which the Court defined as “below-cost prices that drive rivals out of the market and allow the monopolist to raise its prices later and recoup its losses”.[2]  Thus, where the retail prices involved in allegations of price squeezing are predatory in nature, a dominant firm may incur anti-trust liability.  Second, a price squeeze claim can give rise to liability where the dominant firm has an obligation to provide the services at wholesale to its competitors.  The Court concluded that where there is no duty to deal at the wholesale level and no predatory pricing at the retail level, a firm is not required to adopt rates at the wholesale and retail levels that preserve its competitors’ profit margins.

In terms of the wholesale prices charged by a dominant service provider such as AT&T, the Supreme Court noted that any duty to charge competitors rates that preserve their profit margins must be grounded in a corresponding duty to provide services on a wholesale basis to these competitors.  A firm that has no duty to provide wholesale services cannot be obliged to provide such services under terms and conditions favourable to its competitors.  The Supreme Court noted that,

if AT&T had simply stopped providing DSL transport service to the plaintiffs (the independent Internet service providers), it would not have run afoul of the Sherman Act.  Under these circumstances, AT&T was not required to offer this service at the wholesale prices the plaintiffs would have preferred.[3]

With respect to the second component of a price squeeze claim – the assertion that that the dominant firm’s retail prices are too low – the Supreme Court noted that cutting prices to increase business is a core part of competition.  Imposing anti-trust liability for charging prices that are too low risks having a chilling effect on the very conduct that anti-trust legislation is intended to protect, namely, vigorous price competition.   Thus, in order to protect aggressive price competition, retail prices will not attract anti-trust liability unless they constitute predatory pricing.

The Internet service providers’ initial complaint did not allege that AT&T had engaged in predatory pricing.  The Internet service providers were therefore not permitted to raise this issue before the Supreme Court and instead sought leave to amend their complaint.  The Supreme Court remanded this issue back to the District Court for determination.  Based on the above analysis, the Supreme Court firmly rejected the view that a dominant operator’s price squeezing practices can constitute an anti-competitive act absent an existing duty to provide competitors with wholesale services:

Plaintiffs’ price-squeeze claim, looking to the relation between retail and wholesale prices, is thus nothing more than an amalgamation of a meritless claim at the retail level and a meritless claim at the wholesale level. If there is no duty to deal at the wholesale level and no predatory pricing at the retail level, then a firm is certainly not required to price both of these services in a manner that preserves its rivals’ profit margins.[4]

End Notes

[1] Pacific Bell Telephone Co.  v. Linkline Communications. Inc. [2009] USSC, Case No. 07–512 [Pacific Bell Telephone v. Linkline Communications].

[2] Pacific Bell Telephone v. Linkline Communications, ibid. at 8 per Roberts C.J.U.S.

[3] Pacific Bell Telephone v. Linkline Communications, ibid. at 10 per Roberts C.J.U.S.

[4] Pacific Bell Telephone v. Linkline Communications, ibid. at 12 per Roberts C.J.U.S.

 

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